What’s next in the evolution of autonomous cars? Based on Volkswagen’s recent demonstration just this past June at the CEBIT ‘18 Expo in Germany, there seems to be a lot in store for us.

In its presentation, Volkswagen joined forces with the IoT-focused IOTA blockchain project and vehicle manufacturer to show a proof of concept (PoC) for how the IOTA system can be used for autonomous cars. The PoC demonstrated how IOTA’s Tangle architecture can be used by car manufacturers such as Volkswagen to securely transfer software updates “over-the-air” as part of Volkswagen’s new “Connected Car” systems. The demonstration included a panel discussion entitled “Blockchain in Future Mobility.”

AUTONOMOUS VS. AUTOMATED

Not to be confused with “automated,” Jim Tung, a fellow from a leading developer of mathematical computing software Mathworks, gives a clear distinction between automated and autonomous:

“Practically speaking, autonomy is the power of self-governance — the ability to act independently of direct human control and in unrehearsed conditions. This is the major distinction between automated and autonomous systems. An automated robot, working in a controlled environment, can place the body panel of a car in exactly the same place every time. An autonomous robot also performs tasks it has been “trained” to do, but it can do so independently and in places it has never before ventured.”

It is crucial for an autonomous car to be designed so effectively that it chooses the most favorable course of action in every unique situation. What this comes down to is having enough data, which is where IOTA comes into the picture.

WHAT IS IOTA?

IOTA is a revolutionary distributed and open source ledger. Rather than relying on the blockchain, it is based on its very own invention called a “Tangle.” The platform allows connected devices to transfer money numerically in the form of micropayments. Also, the platform has no transaction fees, which is optimal for a micro-payment infrastructure.

The IOTA team is driven by their vision to “enable all connected devices through verification of truth and transactional settlements which incentivize devices to make available its properties and data in real time. This gives birth to entirely new general purpose applications and value chains.” And now they are applying this vision to autonomous cars.

WHAT IS A “TANGLE?”

The Tangle is a new data structure based on a Directed Acyclic Graph. Their system has a topological order that allows for different types of transactions to run on different chains in the network simultaneously. For this reason it has no Blocks, Chain, or Miners. This is a radical new architecture that greatly differentiates IOTA from other Blockchains, allowing for zero transaction fees, secure data transfer, and infinite scalability.

When it comes to Volkswagen distributing data for its connected cars, the fact that different types of transactions can run on different chains simultaneously make this network highly useful.

Another significant difference in IOTA is how transactions are made and the fact that it requires consensus. Because there are no miners, transactions can only be made by participants actively engaging in the consensus of the network. They do this by approving two past transactions. In this way, the system ensures that the entire network achieves consensus on the current state of approved transactions.

IOTA has a range of unique features due to its architecture:

The IOTA website lists a range of its unique features that are enabled by its architecture:

Scalability: IOTA can achieve high transaction throughput thanks to parallelized validation of transactions with no limit as to the number of transactions that can be confirmed in a certain interval

Decentralization: IOTA has no miners. Every participant in the network that is making a transaction, actively participates in the consensus. As such, IOTA is more decentralized than any Blockchain

No Transaction Fees: This is particularly optimal for a micro-payment infrastructure

SECURITY FLAWS?

Learning how to implement this technology effectively will be a process but, once refined, it shows great potential for security and transparency. For example, data integrity in the context of vehicles is pivotal to safety. Even in 2016 the FBI warned consumers of the threat that malicious parties present in exploiting vehicle software.

Recent data by the SANS Institute Infosec Reading Room further demonstrates that it is possible to inject malicious code into vehicle software updates. Threats can include disabling or interfering with power steering, overriding acceleration, applying brakes at any speed, and even tightening seat belts.

“Distributed Ledger Technologies (DLT) are crucial for the future of trusted transactions. IOTA has great potential to become a DLT leader with the Tangle approach,” commented Johann Jungwirth, Volkswagen’s Chief Digital Officer and a member of the Supervisory Board of the IOTA Foundation on the potential importance of blockchain technology in data-sensitive industries.

However, the two-year legal battle between Volkswagen and a team of European security researchers indicates that achieving optimal use of this technology will not come without trials and tribulations. When the researchers had uncovered the details of a security flaw present within the Volkswagen remote keyless vehicle entry system, they tried to publish this information but were hindered by Volkswagen, which used litigation to try to keep things quiet. Now, Volkswagen’s current work with the IOTA project steers in the direction of transparency in the hopes of gaining digital trust with customers, authorities, and third parties.

WHAT TO EXPECT IN THE FUTURE

IOTA’s big dream is a fully autonomous machine economy in which IoT devices can communicate and transact with each other through the Tangle. This greatly applies to the self-driving car. Earlier this year, the IOTA team announced the successful operation of the world’s first vehicle charging station that utilizes IOTA for charging and paying. Also, IOTA plans to integrate their system into a system MaaS (Mobility as a service). This system will use its distributed accounting technology for things such as making reservations and payments for Volkswagen’s autonomous vehicle. This could also lead to using its distributed ledger technology for services such as booking and trip planning, as well as payment services within the smart vehicle ecosystem. Additionally, IOTA partnered on a substantial Mobility Open Blockchain Initiative (MOBI) earlier this month for the transport industry; in doing so they join other manufacturing giants including Ford, GM, BMW, and Renault, along with IBM, Bosch, and Hyperledger.

According to Jungwirth, the IOTA platform will “allow connected devices to transfer money numerically in the form of micropayments,” which is very advantageous for the future of IoT.

As for Volkswagen, they describe their vision for using Tangle in their PoC press release to distribute data within its developing smart car economy wirelessly and securely. By 2020, over 250 million connected cars are expected to be on the road, underscoring the need for frequent updates to remote software and transparent access to data.

FINAL THOUGHTS

IOTA’s partnership with Volkswagen holds implications far beyond connected cars. On its website, the IOTA team describes its technology as “the missing puzzle piece for the Machine Economy to fully emerge and reach its desired potential.” They envision IOTA “to be the public, permissionless backbone for the Internet of Things that enables true interoperability between all devices.” An autonomous system for cars is just one step toward their much larger vision, and how they implement this system could pave the way for future devices.

As MathWorks fellow Jim Tung explains, “there is no one-size-fits all approach to designing — or defining — autonomous systems. In some cases, the goal is to remove human engagement. In others, it’s to augment our physical and intellectual abilities. In all instances, however, the utility of autonomous systems is bound by how much data is collected and what value can be extracted from that data.”

Volkswagen’s progress with the IOTA system could set a precedent for potential future use of distributed ledger technology at-large. It will be interesting to watch how these autonomous systems evolve and where the lines will be the drawn.

The meteoric rise of cryptocurrencies has taken the world by storm. Innovators, investors, users, and governments are scrambling to wrap their heads around cryptocurrencies and the blockchain technology that they rely upon. The emergence of a new market and business model has created great opportunities for participants, but it also carries significant risk.

Cryptocurrencies present an inherently unique challenge to governments because of their new technology, cross-jurisdictional nature, and frequent lack of transparency. Governments are struggling to develop new ways to regulate cryptocurrencies, adapt existing regulations, and identify fraudulent schemes. Cryptocurrencies and their regulations are evolving before our eyes, and this article will provide a brief background on cryptocurrencies and an overview of where cryptocurrency regulations currently stand.

What are cryptocurrencies?

Cryptocurrency is, by any other name, a currency—a medium of exchange used to purchase goods and services. Or, as some have suggested, cryptocurrency is a “peer-to-peer version of electronic cash.” However, this currency has two qualities that distinguish it from traditional bills and coins.

First, cryptocurrency is a virtual currency that is created through cryptography (i.e. coding) and developed by mathematical formulas through a process called hashing. Second, unlike traditional bills and coins that are printed and minted by governments around the world, cryptocurrency is not tied to any one government, and thus is not secured by any government entity. The fact that cryptocurrencies are not secured by a government authority has led to concerns from critics that this is the second coming of Tulipmania, because we are ascribing value to an otherwise valueless item. However, the potential for cryptocurrencies as a medium of exchange remains enormous.

What is blockchain?

Blockchain is the technology at the heart of most cryptocurrencies, and explaining the technology in detail would require a blog post of its own. What is important to know is that blockchain is a record of peer-to-peer transactions categorized into blocks on a distributed ledger. Despite the obtuse terminology, blockchain functions similarly to a local bank authorizing and recording a transaction, but instead of only one party holding the entire ledger book, the transactions are recorded communally by member nodes, with each node being a computer in a peer-to-peer distributed network.

The blockchain can confirm a transaction within minutes, removing errors that exist when trying to reconcile and audit separate ledgers and transactions. Whenever a transaction takes place, the miners on the blockchain develop a new hash and digital signature to update the ledger and create a new “block.” This block, or recorded transaction, is time-stamped and encrypted and will remain on the blockchain for life.

Regulation in the US – Utility Tokens v. Investment Tokens

In the United States, there has been no federal regulation of cryptocurrencies. Instead, cryptocurrencies are often grouped into two non-binding categories: (1) investment tokens that fall under the purview of already existing U.S. securities laws like the Securities Act of 1933 and the Securities Exchange Act of 1934, and (2) utility tokens, which remain largely unregulated (for now).

Security Tokens

Whether the tokens being offered in connection with a particular cryptocurrency are security tokens is decided on a case-by-case basis that even experienced securities lawyers can disagree upon. Tokens are usually analyzed under the four-part Howey Test below to see if the token is in fact a security. Securities must meet the following criteria:

An ​investment of money

in a ​common enterprise

with an ​expectation of profits

predominantly from the efforts of others

Each characteristic of the token is analyzed against this framework to see if the cryptocurrency is in reality functioning as a new-age security. If it is, then regulators treat it as such, and cryptocurrencies must then be registered and handled with all of the same disclosures and precautions as any other security sold in the United States or to U.S. investors.

Utility Tokens

Cryptocurrencies can also be categorized as non-security utility tokens. These tokens purport to offer intrinsic utility and value, and are typically instrumental in powering the blockchain technology. These tokens function more like commodities than securities, and while they may act like currency in a fully functional network, they also have other values.

However, having a utility token with a properly formed and functioning network does not preclude said token from being labeled a security by the SEC. In In the Matter of Munchee, Inc., a purported utility token with a non-functioning network was labeled a security by the SEC. While labeling a token without a functioning network as a security – as it has no present utility – is not unexpected, the SEC also concluded that: “even if [Munchee] tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”

After analyzing the Munchee Tokens under the Howey test, the SEC concluded that they were investment contracts because purchasers of the tokens had an expectation of profits predominantly from the efforts of Munchee and its staff. The SEC further concluded that Munchee had primed such expectations through its marketing efforts.

While this new case does not eliminate the distinction between utility and security tokens, it does caution that, when deciding whether a given token is a security, the SEC will look beyond utility at the character of the instrument, and base their conclusion based on the terms of the offer, the plan of distribution, and the economic inducements held out by the token issuer.

State Regulation

So far only the state of New York has issued any kind of regulation specifically regarding cryptocurrencies: the BitLicense. The BitLicense is New York’s attempt to control cryptocurrencies within its borders by requiring cryptocurrency businesses to register and comply with several different disclosure and financial obligations. The regulation has been divisive, and many businesses have rallied against its high costs. While a few companies have applied for and received the license, most other companies have simply left the state or stopped offering services to its residents.

Regulation Abroad – The Ever-Shifting Jurisdictional Question

The United States is not the only country grappling with how best to regulate cryptocurrencies. Many cryptocurrency businesses face daunting questions regarding in which jurisdictions to form and to do business in. In the end, the question is quite difficult and fact-specific, requiring communication between legal counsel in different jurisdictions and taking into account nebulous and piecemeal country-by-country regulations. It is impossible to do a detailed analysis without knowing how a country’s existing securities laws, financial regulations, and banking regulations will operate (or will be adapted to operate) with cryptocurrencies. The fact that cryptocurrency-specific regulations are still developing does little to add clarity, and makes the analysis even more challenging. Yet a few global trends are noticeable:

Suspending Cryptocurrencies

Some notable countries, like China, and South Korea, have suspended cryptocurrencies. These countries have cited the risk of fraud and the lack of adequate oversight in suspending cryptocurrencies and their exchanges, forcing cryptocurrency companies and exchanges to relocate.

Regulating Cryptocurrencies

Other countries, like Japan and Australia, have adopted disclosure and regulatory measures, or have companies register with the applicable government authority. Several countries have also tried to implement disclosure or registration regulatory regimes when it comes to cryptocurrencies, but such regimes are cumbersome and expensive to fledging companies.

Cryptocurrencies as Commodities

On the other hand, Switzerland and Singapore, two of the countries at the forefront of the cryptocurrency market, have simply stated that cryptocurrencies are assets not currency, and that they will treat them as such under existing regulations.

Conclusion

Ultimately, cryptocurrency regulation remains in its infancy. Piecemeal regulation has already begun around the world as governments enact new regulations to control and legitimize cryptocurrencies, fold cryptocurrencies into existing regulations, or ban them outright. These splintered attempts at controlling a global phenomenon will keep the cryptocurrency market volatile, and pose a challenge to innovators, investors, and users. They will continue to work in the cryptocurrency space while pushing for legislation and regulation that will remove ambiguity and legitimize cryptocurrencies. At the same time, they must grapple with the possibility that new regulations may be confusing, detrimental, or have negative inadvertent effects.